Monday, May 14, 2007

I have decided to go one by one through every stock I can find that is selling at or under its net current asset value (NCAV). This is the Holy Grail of Value Investing as everyone knows, but things have changed from the time of Benjamin Graham. It seems that many NCAV plays are not for the feint of heart. Here is the first:Inhibitex (INHX)

Inhibitex is a biotechnology company out of Atlanta. Last year the company had a product called Veronate, which failed a Phase III trial, and the company discontinued development of the drug. INHX is now focused on Aurexis, which is for the treatment of serious Staphylococcal aureus infections. Aurexis is in the Phase II stage of development. The company recently acquired another pharmaceutical company for $19.0 million in stock.

INHK has $59.6 million in cash at March 30, 2007, with various other current assets bringing the total to $63.3 million. Total liabilities are $12.5 million giving the company a net current asset value of around $51 million. The market capitalization is $45.5 million according to google finance.

Conclusion – INHX has no significant revenues since its drug is still in clinical trials. The company it is buying has no significant revenues due to the same reason. This investment is known as a binary decision. If the drugs under development are approved then things may work out for investors. The problem is that in can take years for the trials to conclude and the results are uncertain. Meanwhile, the company burns cash, as it has to pay research and salaries in the interim.

Now, to its credit, INHX is being prudent in its spending and is not throwing money around. Last quarter, the cash burn was only $1.7 million. The estimate for 2007 is a cash burn of $11 million, but a higher burn rate when the acquisition is completed. My opinion on this one is that the risk/reward is too great for me. If I was a scientist or Doctor and I could understand more of the science of the drugs they are working on then I might think differently.